Arris: Jefferies Gauges Apple Television, Google ‘Home’ Prospects

By Tiernan Ray

Jefferies & Co.’s James Kisner today reiterates a Buy rating on shares of cable technology supplies Arris Group (ARRS), and a $17 price target, writing that there are two potential “catalysts” for the shares, the prospect the company might buy Google‘s (GOOG) Motorola division’s “Home” products business, and the prospect Apple (AAPL) might introduce a television set using Arris’s technology.

Referring to rumors in recent months Google is looking to sell the Home business, Kisner writes “It almost goes without saying that Arris, in light of the company’s recent entry into the set top box space, will consider a bid on the Home business (assuming it is indeed for sale).

“Public commentary by ARRIS management also suggests that the company will examine the assets. We believe other logical bidders would include Ericsson (ERIC), Huawei, CommScope and financial buyers.”

Kisner writes that while a Moto Home business could add to earnings, but actually diminish the stock’s worth:

Purchase Price: $1.5 billion; Capital Structure: We’ve assumed that the Home business comes without debt or balance sheet cash. With respect to the Arris’ financing of acquisition, we assume Arris uses $200 million in balance sheet cash, issues $300 million in equity to Google, and raises $1 billion in debt. Based on current market conditions, we estimate (we believe conservatively) that Arris could borrow at blended rate of roughly 6%. Cash Integration Costs: We’ve assumed $300 million in cash integration costs, all of which are spent in 2014. Taxes: We’ve assumed that the sale of the Home business comes without any NOLs and an associated tax rate around 34% (same tax rate as Arris). Cost Savings: We explicitly model expenses savings of $50 million in 2014 and an another $50 million in As shown below, under these assumptions, we project combined 2014, 2015 and 2016 EPS of $2.07, $2.33 and $2.33. Accretive, but What Multiple? While these estimates suggest the acquisition of the Motorola Home business could potentially be very accretive to Arris’ earnings, but it would likely diminish our view of the upside to the stock under our current assumptions. As shown in Chart 6, Arris’ current share price would reflect a forward P/E multiple of 6x – 7x for the combined company – a relatively full valuation, in our opinion, if earnings growth is nominal or negative.

As for a TV set, Kisner thinks based on industry conversations that a product is “immininent” from Apple, and that it could add to Arris’s earnings based on what cable companies would have to purchase in the way of Arris equipment to support broadband service to Apple televison users:

Our discussions with industry contacts suggest that at least one major N. American MSO is working to estimate how much additional capacity may be needed for a new Apple device on their broadband data network. We believe this potentially suggests an imminent launch of the Apple TV, a positive development for ARRIS, who is directly exposed to data traffic growth from incremental IP video streams on cable networks. In Chart 10 below we examine the potential impact of an Apple TV launch at Arris’ biggest customer, Comcast (CMCSA, $35.40, Hold) (Here we’re talking about an unannounced product, not the Apple TV product that is currently available). It’s important to understand that network capacity is largely engineered to peak traffic levels – thus we’ve based our analysis on what peak data consumption might be based on 50% of Apple TV users watching an HD video stream all at once (this might realistically happen on a Friday or Saturday night). We then translate the incremental data usage to incremental port requirements (each port maps to roughly 40mbps of capacity). Our conversations with industry contacts have suggested in the past that Arris has over 50% of Comcast’s CMTS footprint – thus we assume 55% of the port shipments go to ARRIS. Finally, we assume that these port shipments come at 45% contribution margin; given the relatively high gross margins and software content on the CMTS business, we believe this is realistic. Depending on the unit assumptions, we arrive at an EPS impact of $0.07 – $0.40 for Arris from an Apple TV launch at Comcast. We note that Jefferies analyst Peter Misek is forecasting Apple TV unit sales of 4.9 million units in CY13 and 11.6 million units in CY14. These estimates assume an actual Television product (not a “puck” like the current Apple TV).

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There are 7 comments

NOVEMBER 15, 2012 2:02 P.M.

Sal wrote:

This idiot gages ITV and Apple can't even handle Iphones and IPADS! Enough of rthe BS articles. Why don't you write the fact that Cook is Failing? Write it

NOVEMBER 15, 2012 2:28 P.M.

Walter D'Souza wrote:

How does he know that GOOG "will do" that or AAPL "will do" that?

Does he have indiser info or he's just letting out hot air to justify his paycheck?

NOVEMBER 15, 2012 2:31 P.M.

Anonymous wrote:

are we really going to keep dragging out the iTV rumours again??? Really? Is there that little REAL development going on there?

NOVEMBER 15, 2012 2:37 P.M.

Ed wrote:

Apple is now a dividend stock and we all know what happens to dividend stocks. They no longer are viewed as growth companiies rather they are companies stuck in the mud handing out quarterly dividends. All these companies are the Walking Dead. Cook has led Apple to the Walking Dead Community. This stock hits 250 in 4 months.

NOVEMBER 15, 2012 4:39 P.M.

I NEED THE MONEY wrote:

SPEAKING TO ED .MAN I WISH WE COULD EASILLY BET ONLINE BECAUSE I WOULD TAKE YOUR WAGER FOR $250 IN 4 MONTHS. pe ratio 4. WHAT KIND OF ILLEGAL DRUGS ARE YOU ON? THINK PEOPLE THINK!! YOU DO KNOW HOW MUCH CASH PER SHARE THAT THE COMPANY HAS, DON'T YOU?

NOVEMBER 15, 2012 4:59 P.M.

Ed wrote:

I need money: Apple's new product to be
named IDone. They are finished. Save your
money and invest in Rimm and Cisco. This
company is broke, has no leadership, has
no passion anymore and are losing employees
left and right.

NOVEMBER 15, 2012 9:48 P.M.

I need the money wrote:

Ed Ed when you hear those little voices in your head don't believe everything you think. Next thing you know a long white ambulance will show up at your door then it's off to Wally World. You know the white room with rubber walls and bright lights. This can all be avoided by buying some apple shares at this giveaway price and your life will be happy ever after. I am not sure how you got so far away from the truth but someone has to bring you back to reality.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.